Glossary

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Option

An option is a financial contract or a contingent claim where we have a choice(option) not to exercise if it is not advantageous for us. This optionality is usually built into the pay-off structure. An option is a special case of the more general concept derivative.

Examples of commonly used contracts

  • European call Φ(S(T))=max(S(T)-K,0)
  • European put Φ(S(T))=max(K-S(T),0)
  • American call Φ=max(S(t)-K,0) where we can choose t to be any time between zero and T.
  • American put Φ=max(K-S(t),0) where we can choose t to be any time between zero and T.
  • Asian call Φ=max(ni=1S(ti)/n-K,0), for 0≤t1<t2...<tn≤T
  • Asian put Φ=max(K-ni=1S(ti)/n,0) for 0≤t1<t2...<tn≤T

 

Questions: Magnus Wiktorsson
Last update: 2009 Nov 11 14:09:01. Validate: HTML CSS

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